M&A due diligence checklist example: What documents to include?

Successful due diligence ensures a win-win deal for both M&A parties. 

It helps the buy-side dive deep into sellers’ financial and legal records while making sure the sell-side is presented in the proper light as well. Consequently, both parties engage in a transparent business relationship to avoid legal trouble.

However, the due diligence process for M&A can be tedious and challenging. It can take weeks, if not months, to complete. And often, crucial things might get missed which, in turn, might even lead to a failed deal. According to Bain & Company, about 60% of executives attribute the deal failure to inadequate due diligence. 

Therefore, buyers create due diligence checklists to simplify document collection and ensure that important details won’t get overlooked. 

In this article, we overview what a typical check list for M&A due diligence contains, and why having one is critical for deal success.

Highlights:

• The M&A due diligence checklist is a list of documents an acquirer requests from the target company during the due diligence stage of mergers and acquisitions.
• A due diligence checklist is essential for a successful deal since it helps to make sure all the crucial documents are in place and ready for review.
• Key areas of documents to add to a due diligence checklist include legal, financial, intellectual property, sales, general corporate information, tax information, human resources data, property and equipment, and marketing.

What is a due diligence checklist, and why is it essential for successful due diligence?

A due diligence checklist is a detailed list of documents a buyer requests from a seller during the due diligence stage. 

• Note: The Cambridge Dictionary defines due diligence as “the detailed examination of a company and its financial records, done before becoming involved in a business arrangement with it.”

The due diligence process is an integral part of mergers and acquisitions since this is when an acquirer gets a chance to review the state of the target company to make sure it’s worth a purchase. 

Before the due diligence, an acquiring company prepares a due diligence checklist that lists all the documents an acquirer wants to review. This ensures the target company has all the necessary information prepared, and the buyer has access to it. Thus, it significantly accelerates the deal outcomes, which is beneficial for both sides.

You can structure M&A due diligence checklist documents by investigation areas, including but not limited to legal, financial, intellectual property, sales, general corporate information, tax information, human resources data, property and equipment, and marketing.

Key M&A due diligence steps

Let’s now briefly review the key steps of the due diligence process and preparation of the due diligence checklist M&A. The process will slightly differ depending on whether it’s a public or private company.  

However, the major stages of the M&A due diligence process typically include:

• Handling initial issues 

It includes defining the type of the deal (vertical or horizontal merger, etc.), its nature (hostile takeover or merger of equals, etc.), parties involved, deadlines, and expected end product.

• Building the due diligence team

At this stage, the buy-side assembles a team of specialists in such areas as law, real estate, intellectual property, environmental audits, HR, etc.

• Submitting the due diligence request

The buy-side submits a due diligence request and shares the due diligence checklist with the sell-side.

• Distributing and organizing the documents

All the data required for the due diligence process is prepared and organized according to the due diligence checklist requirements. At this stage, parties also define the way data will be shared (for example, via a virtual data room) and whether the hardware is needed.

• Cooperating on the due diligence findings

It implies defining the channels and process of the buy- and sell-side cooperation during the due diligence, if there’s such a need.

• Reviewing the key sources of information

This implies reviewing such critical information as SEC filings or compliance documentation (SOC compliance, for example).

• Proceeding with additional specialist’s review if necessary

For certain documents review, outside specialists’ consultation might be required. This is especially applicable to various legal documents or intellectual property findings.

M&A due diligence checklist example

Typically, prior to any deal, an acquirer creates the M&A due diligence checklist template to use during the upcoming due diligence process. 

The buy-side can use templates offered by various resources on the web (like this one from Smartsheet) or create the deal-specific due diligence checklist on their own. 

Below, we offer an example of an M&A due diligence checklist to use when drafting one for your upcoming deal.

List of due diligence documents for M&A: Key 8 areas

You should focus on the following information while conducting due diligence.

1. General information documents

Buyers collect general corporate records to familiarize themselves with target businesses.

Organizational documents

• Organizational chart
• Articles of incorporation and corporate structure documents
• Restructuring and reincorporation documents
• Certificate of Good Standing
• List of authorized jurisdictions
• List of subsidiaries, partnerships, and joint ventures
• List of company’s shareholders
• Agreements related to preemptive and registration rights

Business materials

• Business plans and board packs
• Annual reports for the last three-five years
• Corporate bylaws and their specifications

2. Legal due diligence documents

Companies collect legal due diligence documents to eliminate the litigation risks and the risks of inheriting legal issues of acquired businesses.

Legal disputes and litigation

• Concluded, active, pending, or threatened litigation against or initiated by the target company
• Judgments, injunctions, consent decrees, governmental investigations, and similar documents
• Copies of all settlement documents related to the company or its subsidiaries

Agreements and material contracts

• Company contracts and consulting agreements
• Franchise and licensing agreements
• Copies of all guarantees provided to or by the target company
• Indemnification agreements and contingent liabilities
• Auditor’s correspondence and corporate attorneys’ letters to auditors

Loans and obligations

• Copies of all security agreements, mortgages, letters of credits, contingent obligations, and leases
• Copies of all outstanding letters of credit and other bonds
• List of all banks, creditors, and lenders, or guarantors a target company deals with
• All documents relating to outstanding debt, indemnification, guarantee, or other agreements

3. Accounting and financial due diligence documents

Financial information due diligence helps verify whether acquiring a company will be profitable for your business in the long run.

Financial documents and income statements

• Market capitalization and equity documents, including stock purchase agreements, balance sheets, cash flow statements, and deferred revenue
• Three years of audited and unaudited financial statements
• Budget plans, including operating and capital budgets 
• Copy of the general ledger, including accounts payable and accounts receivable
• Bank statements for all business accounts

Control methods and material agreements

• List of internal control procedures
• Insurance coverage
• Insurance policies and audit reports
• Accounting methods, including amortization and depreciation methods for the past five years
• Credit agreements, including lines of credit and loans

Tax information

• Tax structure and tax returns for the last three years
• Copies of all tax sharing, tax benefit, or transfer pricing agreements
• Description of all tax audits involving the target company for the last three tax years 
• Statements of property taxes paid by the target company
• Government audits

4. Sales and marketing due diligence documents

Buy-side companies collect sales and marketing due diligence documentation to ensure that the target company can generate forecasted profits.

Customer insights

• List of top active and former customers with revenue records
• Customer analysis
• Copies of material customer contracts and long-term sales contracts
• Records and summaries of warranty claims

Marketing insights

• List of top suppliers, distributors, and resellers
• Market research records
• Marketing agreements, strategies, and plans

Products and advertising materials

• List of existing and unreleased company products and services.
• Advertising materials, including sales sheets, press releases, brochures, and TV commercials
• Sales analytics

5. Human resources due diligence documents

Human resources due diligence documents help you determine a target company’s key talents and integration opportunities.

Employee insights

• Current employee demographics
• CVs of key employees
• Employee benefits and handbooks

HR contracts

• Non-disclosure, non-compete, and non-solicitation agreements
• Employee skills and competence evaluations
• Employment contracts
• Payroll documents, deferred workers compensation plans, and pension plans
• HR policies and practices
• Labor disputes

6. Intellectual property due diligence documents

Conducting due diligence of the target company’s intellectual property structuralizes its IP portfolio and ensures there are no hidden IP rights issues. You should focus on the following information.

Patents and software

• Patents, patent applications, proprietary software and IT systems, trade secrets, and their descriptions
• Copies of patent research and development, licensing, and collaboration files
• Licensing revenues and expenses

Ownership information

• Trade names, trademarks, and copyrights (both material and unregistered)
• Chain of title records
• List of websites and social media accounts

IP protection information

• Documents regarding IP protection measures
• Claims and threats around IP

7. Property and equipment due diligence documents

Property due diligence helps you verify the target company’s tangible physical assets to determine the acquisition value. You should request the following information.

Company’s property audits

• Copies of inventory listings at the end of the fiscal month and year
• Documents regarding inventory storage practices
• Lists of leased and owned properties, real estate, and fixed assets with specifications (date acquired, location, cost, etc.)

Legal information

• Equipment leases and property deeds
• Copies of equipment appraisals
• UCC filings

8. Strategic due diligence documents

Strategic fit due diligence helps a buyer understand the target company’s total value and determine whether the deal is profitable in the long run. You should decide whether the target company fits your strategic plans by evaluating due diligence findings in other areas.

To do so, you need to evaluate the following information:

• Acquisition value drivers, including technology, markets, products, and intellectual property
• Assessments of marginal costs following the company’s acquisition
• Evaluations of synergies in sales, management, production, and other areas
• Review of acquisition risks
• Availability of complementary products to the buyer’s products

How to collect due diligence documents?

Businesses employ a step-by-step approach for collecting due diligence documentation:

1. Time frame negotiations
   
   You should decide on approximate due diligence deadlines and discuss guidelines for emergencies.
   
2. Team formation
   
   Delegate document collection to accountants, attorneys, and M&A experts. Each due diligence team might follow a dedicated due diligence checklist in financial, legal, marketing, and other investigation fields.
   
3. Document collection
   
   Collaborate with sell-side teams, send request checklists, and collect documents in a virtual data room.
   
4. Findings evaluation
   
   Carefully analyze due diligence findings to minimize overlooked benefits and risks of the upcoming merger or acquisition.

Three common issues to be aware of while collecting due diligence documents

Here are three of the most common mistakes to avoid while collecting due diligence documents.

1. Treating document collection as a simple audit

Around 70-90% of M&A deals fail because buyers misevaluate the benefits and risks of anticipated acquisitions. These failures often originate from improper, rushed investigations and misleading conclusions about business sellers.

It happened to Bank of America, which lost over $50 billion due to the collapsing mortgage market and fraud settlement after acquiring Countrywide Financial.

You can avoid many M&A issues by emphasizing and evaluating the deal’s benefits and risks discovered during the due diligence process.

Completing checklists for due diligence is crucial, but the whole process is a deep analysis of the target company, not a simple audit.

2. Failing to involve industry experts

It’s okay if your compliance team lacks experience in all dedicated due diligence areas. However, you might risk overlooking critical issues if you delegate due diligence document collection to general analysts.

Instead, hire third-party professionals to compensate for your team’s knowledge gaps.

3. Failing to recognize inapplicable documents

There is no one-size-fits-all approach to collecting due diligence documents, even though it might seem that way when using due diligence checklist templates.

You can use them as a reference to set the due diligence direction and speed up the process by developing organization-specific checklists. Otherwise, you may end up reviewing irrelevant documents.

Virtual data rooms for the M&A due diligence process

Virtual data rooms (VDRs) are a surefire way to handle due diligence effectively and securely.

The due diligence process involves a lot of sensitive document sharing, which is why a high level of data security is of paramount importance. Virtual data rooms allow not only to store and share large volumes of data on the cloud but also do it securely thanks to the various security measures. 

For example, virtual data rooms ensure strict access control through multi-level access permissions and multifactor authentication. Additionally, VDR vendors provide dedicated document security features such as redaction, watermarks, or fence view.

What’s more, many virtual data rooms offer ready-to-use due diligence checklists that can be customized, which significantly accelerates the due diligence process. On the other hand, many vendors also allow for creating detailed due diligence checklists in Excel tables, which is another helpful alternative.

Summing up

The M&A due diligence checklist aims to ensure that no critical data is missed during due diligence. 

This, in turn, significantly boosts the chances of a successful deal closure. 

The contents of the due diligence checklist depend on the type of the deal, its objectives, and the parties involved. The typical areas of documents to add to a due diligence checklist include financials, human resources information, marketing and sales materials, tax data, legal documents, and more. 

You can create a deal-specific due diligence checklist on your own using the example given in the article or opt for the templates many VDR providers offer.